Finance Ministry flags rising external risks as trade deficit and CAD expand

New Delhi [India], March 29 (ANI): External sector pressures are building up for the Indian economy amid a volatile global backdrop, with recent data from the Finance Ministry's Monthly Economic Review for March 2026 pointing to a deterioration in trade dynamics, widening imbalances, and emerging stress from capital flows and commodity prices.

According to the review, India's merchandise trade performance has weakened at the margin even as import demand has surged sharply. The report noted that "merchandise exports declined marginally by 0.8 per cent (YoY)," reflecting subdued external demand conditions and the impact of global uncertainties. In contrast, import growth has been significantly stronger, with the review highlighting that "imports have increased by 24.1 per cent (YoY), widening the merchandise trade deficit considerably."

A key driver of this surge in imports has been precious metals. The Ministry observed that "this increase in merchandise imports was primarily driven by a rise in gold and silver imports," which recorded exceptionally high growth rates. This trend has added to pressures on the trade balance at a time when export momentum remains fragile.

The combined effect of declining exports and rising imports has translated into a sharp worsening of the trade deficit. As per the review, "the merchandise trade deficit... widened to USD 27.1 billion in February 2026 from USD 14.4 billion in February 2025," marking a substantial increase and signalling growing external imbalances.

These pressures are also reflected in the broader balance of payments position. The report stated that "India's current account deficit widened to 1.3 per cent of GDP in Q3 of FY26, from 1.1 per cent of GDP in Q3 FY25," driven largely by a higher merchandise trade deficit despite continued strength in services exports. The widening deficit implies increased dependence on external financing at a time of heightened global uncertainty.

On the capital account side, the situation has become more challenging, with global risk aversion weighing on investor sentiment. The review pointed out that "increased geopolitical uncertainty has dampened global risk appetite; as a result, the portfolio flows remained negative in March 2026." This trend of portfolio outflows has contributed to financial market volatility and added pressure on the external sector.

At the same time, rising global crude oil prices have compounded the strain. The Ministry flagged that "rising tensions in West Asia have driven global crude oil prices higher, posing a growing risk to India's merchandise trade balance." Given that crude oil constitutes a significant share of India's import basket, elevated prices are expected to further widen the trade deficit and increase the import bill.

These developments have also begun to reflect in currency movements. The review noted that "portfolio capital outflows... have contributed to depreciation pressures on the Indian Rupee," underscoring the combined impact of capital flow volatility and trade-related pressures. (ANI)

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